CFTC announces it is examining crude oil market and derivatives

The Commodity Futures Trading Commission broke with its tradition of not disclosing current investigations and announced on May 29 that its enforcement division is continuing a crude oil market and derivatives inquiry which began in December 2007.

The investigation announcement was one of three measures which also involve expanded international surveillance of crude oil trading and increased domestic energy market trading transparency.

"Today, the commission is taking important steps to ensure that the US energy futures markets function properly and operate free from manipulation and abuse. With these initiatives, we are improving our oversight capabilities and bringing greater sunshine to these markets," CFTC Acting Chairman Walter L. Lukken and commission members Bart Chilton, Michael Dunn and Jill E. Sommers said in a joint statement.

The CFTC's announcement came two days after US Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.) sent Lukken a letter asking it to dig deeper for more information about oil commodity trading on foreign exchanges. "The steps announced today by the commission should help it answer the detailed questions I sent to the acting chairman earlier this week on oil trading in dark markets, regulatory loopholes for swap dealers and lack of transparency requirements," Bingaman said on May 29.

He said that he planned to invite Lukken to appear before the committee to describe how the initiatives address concerns that Bingaman has raised "that the commission lacks a robust understanding of the oil market. I will continue to press for the increased regulation and transparency needed to ensure that oil markets are functioning properly."

'Rampant speculation'

US House Energy and Commerce Committee leaders said the commission's announcement was encouraging but fell short of what is needed. "Unfortunately, the CFTC has not proposed how to close off the loopholes that allow commodity index funds and others to take such massive positions that possible distort oil futures markets. The failure to corral this rampant speculation is not only ravaging consumers, but harming businesses such as airlines, trucking and auto manufacturers," chairman John D. Dingell (D-Mich.) said.

Bart Stupak (D-Mich.), who chairs the committee's Oversight and Investigations Subcommittee, said that the announcement was welcome but added that "there is much more that needs to be done to improve transparency and ensure that futures markets are not turned into a cash machine for speculators. Our subcommittee is identifying the driving forces that have caused excessive speculation in the oil markets, which has inflated oil prices to the point that they are no longer tied to underlying supply and demand."

Pete V. Domenici (R-N.M.), the Senate Energy and Natural Resources Committee's ranking minority member, said that it was appropriate for the CFTC to take steps to increase oil market transparency and investigate whether market manipulation is occurring. "While it is clear that fundamental supply and demand issues are mostly to blame for the current high price of gasoline, it is certainly worth examining whether speculators are also having an impact. I look forward to the results of this investigation, which should help Congress decide if any legislative action on market manipulation is warranted," he said.

Federal lawmakers have said that some futures traders are making deals for US crude oil commodities on overseas markets to escape domestic exchanges' disclosure requirements. One of those foreign exchanges, the International Commodities Exchange, recently agreed to supply information about contracts which are identical to commodities which are traded in the United States. Stupak and other congressional critics have suggested that the CFTC's jurisdiction needs to be extended further. They do not accept arguments that regulation may not be appropriate for riskier energy commodity positions.

Unprecedented conditions

In its announcement, the CFTC said that its enforcement division launched a nationwide investigation into practices surrounding the purchase, transportation, storage and trading of crude oil and related derivatives in December 2007. It said that while it normally conducts enforcement investigations on a confidential basis, it decided to disclose this inquiry because of current unprecedented market conditions. Specific aspects of the investigation will remain confidential, it indicated.

It said that it also outlined terms under which Britain's Financial Services Authority and ICE Futures Europe will share more information about West Texas Intermediate crude oil and other futures contracts that trade on both NYMEX and ICE. While the ICE contract is a cash-settled instrument that does not allow physical oil delivery in the US, its price is linked to the NYMEX contract's settlement price, the federal commodities regulator said.

The agreement includes expanded information-sharing to give the CFTC daily large trader positions in the British WTI contract, large trader positions for all and not just the near contract months, near-term commitments to supply more detailed market end-user identifications and improved data formats so information can be integrated more quickly into the CFTC's data system, and a commitment by ICE Futures Europe to notify the CFTC when traders exceed position levels on the foreign exchange which are established on US markets for WTI crude oil contracts.

The CFTC said that since 2006, Britain's FSA has supplied the US regulator weekly trading information and daily trading information during the final week to facilitate rigorous oversight of trading in related contracts on the two countries' exchanges, specifically the linked crude oil contracts on both NYMEX and ICE. It said that NYMEX currently maintains about 75% of the open interest in these contracts while ICE accounts for about 25%.

The increased transparency initiative mainly involves index trading, which the commission said is relatively new to futures markets. It said that it will use its existing special call authority to immediately begin to require energy market traders to provide it with monthly index trading reports. It also plans to develop a proposal to routinely require more detailed information from index traders and swaps dealers, and to review whether classification of such traders can be improved for regulatory and reporting purposes.

Finally, it said that it would review index traders' practices to determine whether this type of trading is not adversely affecting the price discovery process, and to determine whether different practices should be employed.